Sales and Use Tax Annotations

Annotation 120.3700

(c) CUSTOM PROGRAMS

120.3700Software for Computerized Branch Exchange. A taxpayer's major product is a Computerized Branch Exchange system (CBX). Each CBX is configured to meet the customer's unique requirements. Therefore, the software of each CBX installation is unique. The taxpayer inputs information received from its customers with respect to the customers' needs into a separate program for use in generating the software necessary to run customer's individualized CBX system. The process requires the taxpayer to modify prewritten software consisting of the general framework for all CBX systems.

Under the scenario, tax does not apply to the taxpayer's charges for modifying this software when these charges are separately stated on the sales invoice to its customers. If the taxpayer does not separately state these charges and does not market or sell the prewritten component of software, the individual CBX software is "custom" and not subject to tax only if the charge for customizing the software was more than 50 percent of the contract price for the CBX software. When these conditions are met, the taxpayer's sale of the individualized CBX software is not subject to tax regardless of the form in which the program is transferred (i.e., via disk, tape, or modem), whether or not the software is sold in connection with the sale or lease of computer equipment and whether or not the charges for the software are separately stated. If these conditions are not met, tax applies to the entire charge for the software. 5/8/95.

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